Credit Suisse has reiterated its 2010 growth forecast for Israel at 3.4%, but cut its 2011 growth forecast to 3.8% from 5%, due to a less favorable outlook for forecasts. The bank says, "The economic recovery remains on track, but headwinds are intensifying."
Credit Suisse warns however, "Recent global economic developments, such as the fiscal crisis in the euro area, have increased uncertainty about the medium-term outlook for Israel." It notes that external demand played a crucial role in pulling Israel's economy out of the recession. Therefore, "A slower recovery in key export markets in the coming quarters would increase the importance of accommodative monetary and fiscal policies if the recent pace of economic expansion is to be preserved."
Credit Suisse adds that slowing domestic demand will not generate strong inflation pressures. The Bank of Israel can therefore continue to raise the interest rate very gradually. Credit Suisse lowered its interest rate forecasts to 2.25% at the end of 2010 from 2.5%, and to 3.25% at the end of 2011 from 3.75%.
Credit Suisse predicts that Israel's inflation rate will be 2.3% in 2010 and 2.6% in 2011.
Credit Suisse believes that the combination of lower GDP growth and a slower pace of interest rate hikes will ease the shekel's appreciation, and it cut its shekel-dollar exchange rates forecasts to NIS 3.70/$ at the end of 2010 from NIS 3.60/$, and to NIS 3.60/$ at the end of 2011 from NIS 3.40/$.
Credit Suisse praises Governor of the Bank of Israel Prof. Stanley Fischer and Supervisor of Banks Rony Hizkiyahu for their recent measures to deal with the real estate bubble, with the publication in late May of a draft directive ordering the banks to tighten mortgage lending requirements. The maximum loan-to-value on mortgages was reduced from 70% to 60%, and the banks will have to make larger provisions for loans that exceed this level. "This move suggests to us that the Bank of Israel will not seek to tackle rising house prices, one of the few remaining threats to overall inflation, through aggressive rate hikes in the near term," says the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2010
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